Patents drive blockbuster deals in drug industry

Actress Nicole Kidman attends Hollywood Foreign Press Association's 2013 Installation Luncheon at The Beverly Hilton Hotel in August. She and other actresses are well-known for using Botox to combat signs of aging.

A series of blockbuster deals in the pharmaceutical industry drove share prices higher Tuesday as companies look for new sources of revenue as more major drugs are set to lose their patent protection.

Canada’s Valeant Pharmaceuticals International Inc. led the way with a nearly $45 billion (U.S.) joint offer with U.S. activist investor Bill Ackman for Botox maker Allergan Inc.

Shares in Valeant rose 7.7 per cent Tuesday to $149.38 in Toronto, while Allergan jumped 15.2 per cent to $163.65 (U.S.) in New York on speculation others might jump in with rival bids for the Irvine, Calif.-based company.

At the same time, Swiss pharmaceutical giant Novartis AG announced a series of deals worth up to $28.5 billion (U.S.) with rival drug makers Glaxo Smith Kline plc and Eli Lilly & Co.

The announcements have helped drive drug company takeovers to a five-year high, according to Bloomberg.

Drug industry deals last peaked in 2009, when New York-based Pfizer Inc. bought Philadelphia-based Wyeth in a deal valued at $64 billion (U.S.). It was one of three pharmaceutical industry mega-mergers that year.

More mergers may be coming this year, as drug companies seek to boost profits by specializing in segments of the industry or insulating themselves from the potential devastating impact of expiring patents.

“As we all know, there’s a lot of pressure to bring drug prices down,” said Laurence Booth, a finance professor at the University of Toronto’s Rotman School of Management. Drug companies “spend a huge amount developing drugs and it’s very easy to knock off those drugs as soon as the patent protection runs out.”

It’s been dubbed the “patent cliff.”

A number of blockbuster drugs are set to lose their patent protection in the next two to three years, including arthritis treatment Celebrex and cholesterol fighter Crestor. Others have already done so, such as Pfizer Inc.’s best-selling Lipitor, another cholesterol fighter.

As health plans opt for cheaper generics, drug company sales can plummet unless they find new drugs or new lines of business, analysts said. One way to do that is through acquisitions, and most drug companies are flush with cash.

Valeant has upped the ante by confirming it’s making a play for Allergan with the backing of Ackman’s Pershing Square Capital Management Inc.

The deal would see each Allergan share exchanged for $48.30 in cash and 0.83 shares of Valeant Pharmaceuticals’ common stock.

Allegan stockholders would own 43 per cent of the combined company. Pershing Square — Allergan’s biggest stockholder with 9.7 per cent — would take only stock in the transaction.

If approved, the deal would boost Valeant’s offerings in eye care and cosmetic drugs and add to a string of more than 50 acquisitions that have made it one of Canada’s largest drug makers.

Allergan CEO David Pyott and the company’s board has made it clear they’re not interested in entering discussions, Valeant’s chair and chief executive officer Michael Pearson said in a statement. Allergan said only that it would evaluate an offer if one is received.

Valeant said it believes combining its business with Allergan would result in $2.7 billion (U.S.) a year in cost savings.

Considered one of the stars of the “specialty” drug segment, Allergan had 2013 revenues of $6.3 billion (U.S.), with Botox sales accounting for nearly a third of that total. Botox injections are best known for smoothing wrinkles, but the drug can also be used to treat migraine headaches and other disorders.

Valeant also announced Tuesday that it is raising its full-year earnings forecast to $8.55 to $8.80 per share, up from $8.25 to $8.75 per share. It also boosted its revenue guidance to between $8.3 billion to $8.7 billion. Previously, the company predicted revenue of $8.2 billion to $8.6 billion.

Other drug makers are hoping to become more profitable through specialization, analysts said.

“Rather than fighting each other in all areas, which hurts profit margins, big pharma companies will streamline their portfolios and specialize more to boost their bottom line,” Enrique Quemada, head of the Madrid-based advisory firm OnetoOne Corporate Finance, told Bloomberg.

In a series of deals announced Tuesday, Novartis said it will boost its offerings in cancer treatment through the purchase of Glaxo Smith Kline plc’s cancer drug business for as much as $16 billion (U.S.).

Novartis, whose best-selling cancer drug is Gleevec, will get Glaxo’s more recently approved Tafinlar and Mekinist for melanoma.

In turn, Glaxo will buy Novartis’ vaccine business, a segment less vulnerable to patent life cycles, for $7.1 billion.

Eli Lilly & Co. said it would buy Novartis’ animal health unit, making it the second-largest player in that business by sales.

A joint venture between Novartis and Glaxo will focus on consumer health products, bringing together the makers of Excedrin painkiller with Sensodyne toothpaste, the companies also said.

And more deals may be on the horizon.

Merck & Co. is in talks to sell its consumer health unit, according to people familiar with the matter.

Germany’s Bayer AG and Paris-based Sanofi have both said they’re interested in consumer health.

With files from Star wire services

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